What are Assets?

Meaning

An Asset is an item owned or controlled by a business. It has economic value that can be realised by either converting it into cash or generating income for the company. Examples of an asset include the following:

  • Cash and cash equivalents
  • Furniture
  • Machinery
  • Investments
  • Property
  • Factory
  • Patents
  • Trademark and more

What are the features of an Asset?

The main features of an asset are as follows:

  • Ownership: Assets signify ownership or control by the business for purposes of production. The company can sell these assets in exchange for cash and cash equivalents.
  • Economic Value: Every asset has an economic value, and this asset can also be exchanged or sold in the market.
  • Resource: Assets are a resource that can generate revenue for the business. For example, machinery can enhance the production capacity of the firm resulting in economic benefits.
  • Maintenance Cost: Most assets have a maintenance or repair cost. Regular maintenance helps the asset to run smoothly and not hamper the business operations. If an asset breaks down temporarily or permanently, it leads to substantial revenue losses for the organisation.
  • Depreciation: Depreciation is a reduction in the book value of an asset due to factors like wear and tear or obsolescence. It is an ongoing process that terminates only at the end of an asset’s useful life.
  • Estimated useful life: An asset has an approximate life span during which it can function efficiently. For items like machinery, which are essential for the production of goods, the estimated life is either known to the vendor (who sells the asset to the company) or a qualified professional (who calculates the life span based on the asset’s present condition and estimated usage)
  • Scrap Value: An asset starts to depreciate over some time due to wear and tear or obsolescence. After a few years, the asset becomes non-functional or obsolete and has no use for the business. But it still has some salvage value which the company can realise by selling it to a scrap dealer. This value is known as the scrap value of an asset. The scrap value generated by selling this asset is an indirect income for the business.

Classification of Assets

Assets get divided into different groups based on specific criteria. They are as follows:

  • Convertibility into cash: Here, an asset is classified based on the ease of exchanging cash or cash equivalents. They are current assets or fixed assets. Current assets can be converted into cash and cash equivalents generally within a year. They are also known as liquid assets. Cash, cash equivalents, inventory, short-term deposits, office supplies, accounts receivables, etc., are examples of current assets. Fixed or Non-Current Assets are those which the firm cannot readily convert into cash and cash equivalents. Land, machinery, building, equipment, patents, trademarks, etc., are examples of Fixed Assets.
  • Physical Existence: This criterion divides assets into two groups: tangible assets or intangible assets. Tangible Assets have a physical form and can be used as collateral to obtain loans for the business. Land, Machinery, Building, Equipment etc., are examples of tangible assets. On the other hand, intangible assets do not have a physical form, but they can generate revenue for the business. Goodwill, Copyrights, trademarks, patents, licenses and permits are some examples of Intangible Assets.
  • Usage: This category divides assets into operating assets or non-operating assets. Operating Assets are those assets that a firm needs for the regular operation of their business to generate revenue. Inventory, building, accounts receivable, equipment, machinery, Patents, goodwill, copyrights etc., are examples of operating assets. The firm does not need Non-Operating Assets for regular business operations, and it can also generate revenue. Short-term investments, vacant land and property, marketable securities, Interest income, etc., are examples of a Non-Operating Asset.

Difference between Assets and Liabilities

While assets are items that have an economic value and generate revenue for the business, Liabilities are debts or obligations for a company that it owes to outsiders. Both are present in the Balance Sheet, but there are essential differences between them which are as follows:

Assets

Liabilities

Meaning

Assets are items owned or controlled by the business, and they have economic value and are used to generate revenue for the firm.

Liabilities are debts or obligations for a business that it owes to other parties.

Ownership Status

Assets are items that are owned or controlled by the business

Liabilities are items that the firm owes to other businesses.

Depreciation

Fixed assets are subject to depreciation over their lifetime, while Current Assets are not.

Liabilities are not subject to depreciation over their lifetime.

Types

The main categories under Assets are based on liquidity (fixed assets and current assets), physical existence (tangible assets and non-tangible assets) and usage (operating assets and non-operating assets)

The main categories under Liabilities are Current Liabilities, Non-current liabilities and Contingent liabilities.

Cash Flow

Assets help in generating cash inflow for the business.

Liabilities result in a cash outflow for the business.

Treatment in books of accounts

Any increase in an asset gets debited and a decrease is credited.

Any increase in a liability is credited and the increase gets debited.

Calculation

The formula for calculating Assets is :

Assets = Liabilities + Shareholders’ Equity

The formula for calculating Liabilities is :

Liabilities = Assets – Shareholders’ Equity

Balance Sheet

Assets are present on the right side of the balance sheet.

Liabilities are present on the left side of the balance sheet.

Examples

Examples of assets include cash, cash equivalents, machinery, land, securities, property, factory, building, patents, trademarks, licenses, etc.

Examples of Liabilities include long-term and short-term loans, interest payable, mortgage, bank overdrafts, deferred tax liabilities, capital leases, etc.

Conclusion

Assets are an essential part of any business, and they are needed to carry on production activities for the firm, which will bring in revenue. It can also generate income by selling or leasing to other parties.

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